Executive Pay 2010

From compensation for my daughter who is a junior sales executive at a national company to corporate chairmen – friends at global entities – how to address employee compensation is a critical topic in the righting of the American economic ship.

In my daughter’s case, the answer was a corporate-wide pay freeze due to “business weakness” despite her and few others’ personal high achievement. In the case of top executive at publicly traded companies, the issue is defined as rebalancing total compensation between cash and stock options to insure long term decision-making effectiveness.

Lost in the conversation are the topics of making public employees or government as accountable for decisions as private company executives and integrity. We’ll talk about government issues at the end of this piece.

I believe any of the three alternative approaches above, i.e. a total pay lock-down, cosmetic rebalancing or status quo, are solutions to the fundamental problem of the self – serving focus of people in authority.

What I am helping several private company clients do, in positioning their businesses for eventual sale or IPO, is restructuring executive roles to be more strategic than functional and linking total compensation to the long-term performance of their organizations. We are doing this through a gradual re-alignment of the organization to fit the concurrent evolution of each business and, at the same time, adding a layer of non-cash compensation.

A revised compensation structure includes not only base pay, bonuses, tailored insurance and retirement vehicles, but also warrants that are exercisable with a change of ownership or longer-term under special circumstances if the executive leaves the company in good standing. This is a work in progress with counsel, compensation consultants and business valuation advisers, but offers owners an ability to encourage and reinforce executive behavior that optimizes the total performance of the company and not the individual income of selected employees. Moreover, it does not dilute owners’ executive control or create unfunded tax obligations for executives.

The current Administration is trying to foster regulations that require banks and other financial institutions (except Fannie Mae and Freddie Mac employees) to craft incentives along lines proposed by Professor Kane of Boston College. His idea is to bonus senior executives with a special class of stock that has clawback provisions, requiring a return of capital if the company becomes insolvent. This seems like a smart but unworkable idea.

The second proposal is to establish a “West Point for regulators” according to Jason Zweig at the Wall Street Journal. The concept is to instill “a sense of honor and duty” with those charged with oversight. With these goings-on in Washington, I wonder where all the adults, all the educators, and all the parents have gone so that smart people think we need an institution to teach adults in responsible position about honor.

Integrity and honor, traditional concepts, are fundamental to motivation. Beyond that, compensation issues are central to behavior that potentially maximizes executive conduct to benefit all stake holders. In contrast, many contemporary boards and managers have arranged compensation to optimize personal returns while sub-optimizing benefit to their cohorts. Under a capitalistic system it appears to me to be straight-forward: tie wealth creation to long-term performance whether executives stay with or leave organizations.

Jason Zweig, in is WSJ article, rhetorically notes: “It’s probably too much to ask for Congress to abide by the simple principles (honor, duty and long-term accountability even after leaving office), but we can dream. Could anyone possibly doubt this would wake up the watchdogs?”

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